Why US Retail Sales Are Up Even as Consumers Deleverage

We were curious about what would happen yesterday. The market sold off on Friday. The question was: are investors rejecting Ben Bernanke and his printing press money?

Another big drop in stocks yesterday would have confirmed the rejection hypothesis. A big increase in stock prices would have suggested that investors were on board with QE.

So what happened?

Nothing. The Dow was either up 9 or down 9, we can’t remember which. Gold was up $3. Nothing significant, in other words, in either direction.

So, Mr. Market is going to keep us wondering…guessing…cogitating…

..what’s going on?

And here’s something that has us wondering about. Retail sales are up. Here’s the Bloomberg report:

Sales at US retailers climbed in October by the most in seven months, brightening the outlook for holiday shopping even as unemployment holds near 10 percent.

Purchases rose 1.2 percent, exceeding the highest forecast among economists surveyed by Bloomberg News, according to data from the Commerce Department issued today in Washington. Another report showed manufacturing in the New York region unexpectedly shrank in November as orders dropped.

“We expect the holiday shopping season to really ramp up in November,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, who forecast a 1.1 percent gain in sales. “The breadth of discounting” and steady income gains are “providing some support,” he said.

The improvement in spending comes as other parts of the economy show signs of cooling.

Wait a minute. Isn’t the consumer de-leveraging? Isn’t he paying down debt and defaulting on his mortgage? How can he be increasing spending?

Well, maybe with all this talk of quantitative easing has unsettled him. Maybe he thinks the world as we have known it is ending…maybe he’s decided to enjoy it. Or maybe the consumer believes that the Fed will really succeed in stirring up the economy. So, maybe he’s feeling more confident. Or maybe he thinks the Fed will destroy the value of the dollar, so he’s getting ready for inflation – spending his money as fast as possible.

Or, most likely…this is just a little, insignificant blip of information…meaningless noise, in other words.

Households are not likely to really increase spending. They don’t have more income. Their houses are worth only about 70% of what they were three years ago, and still going down. Their credit ratings are impaired. Lenders are more cautious. And so are consumers themselves.

So, we’re not going to take this news very seriously. We just didn’t want you to think that we were hiding developments that don’t seem to fit our Great Correction hypothesis. We’re not hiding them; we’re just ignoring them.

And more thoughts…

Elizabeth went to church on Sunday.

“The sermon was about the need for charity,” she reported. “The minister said she was shocked when she went to the local food bank…you know, where people contribute food for the poor. She said there was very little food there, because people have not made many contributions…

“She said we should look around at our neighbors…realize that people are going hungry…and reach out and help them.

“But I thought about our neighbors. And I couldn’t think of any one of them who was hungry. It seemed to me that they mostly needed to lose weight, not gain it.

“So it made me suspicious of this whole line of argument. I mean, you get the feeling that people are just saying these things mechanically…or because they think they should say them. They don’t really seem to be thinking very much about whether there really are people who need food…or why…or whether you do more harm or good by giving them food.

“That’s the trouble with organized charity… It’s like foreign aid or like welfare…[or even like bank bailouts, we wanted to add]. It makes the giver feel better about himself, but it may do real harm to the recipient.

“Real charity is hard work. You’d have to go out and meet the people who are supposed to be hungry. And you’d have to find out why they are hungry. If they’re hungry because they’re too lazy to work…or because they’re taking drugs all day…you’re probably not doing them much real good by giving them food. All you’re doing is making it easier for them to be lazy or addicted.”

We thought about it for a moment.

Then at a funeral on Monday, we heard about the charitable contributions of the deceased.

“My mother did more than just give money to charity. She actually helped people,” said her daughter.

“There was a family that lived down the road from us when I was little. This was a family that had been on welfare for three generations. Well, my mother decided to help them. She was always so positive. So chipper. So ready to help.

“But she didn’t just give them money or clothes or food. She gave them all those things. But she went a big step further. She brought them into our house. There was a separate mother-in-law’s apartment in the house. She brought them in and worked with them.

“And guess what? She broke the cycle. Those kids are grown up now. And I don’t think any of them are on welfare.”

“All institutions tend to go in the same direction,” we began, professorially, speaking to Elizabeth. “They start out with good intentions. They do good work. They satisfy the need they were set up to satisfy.

“And then they become corrupt and degenerate. I don’t mean that they steal. I just mean that they become self-serving. Like the US government. It was set up to protect the liberty of Americans. The Constitution and the Bill of Rights very carefully limited the power of the government. But now the government mostly tries to protect the pensions and health care programs of the people who control it.

“No one cares about liberty…or at least, no one working for the US government. The feds can get away with almost anything. You can’t smoke a cigarette in your own restaurant. Jules was kicked out of a bar last weekend because he gave a drink to his brother on his birthday. Now we’re going to have to buy health insurance – whether we want it or not. There are probably a few things the federal government still cannot do…but there aren’t many of them. And government employees are paid twice as much as the people who pay their salaries.

“It probably works the same way at charities. As they mature, they become more interested in looking out for themselves than they are in looking out for the people they’re meant to be helping. They still go through the motions of helping people. But they don’t seem to care if it does any genuine good.”

*** Most of the work of activist governments is hopelessly ineffective and unproductive. But that doesn’t stop them. When their programs don’t work, the feds rarely wonder why. Instead, they force the issue…with more regulation, penalties and coercion. Look at Hugo Chavez in Venezuela. Here’s the latest from Bloomberg:

[Venezuela] will offer local investors high yields to stimulate saving and allow nationalized companies to seek financing. The Public Bond Market, which will begin operations in December, will allow state-run companies to sell debt to finance operations and individuals to seek investment opportunities, Chavez said.

Chavez tightened his grip on the financial industry this year by closing more than a dozen banks and 40 brokerages that he said committed “fraud” and set artificial exchange rates. He said investors will have their investments guaranteed by the state.

“The banking and brokerage crisis has allowed us to draft this law,” Chavez said yesterday on state television during his Alo Presidente program. “Don’t spend all your year-end bonuses, invest in the bourse, and the state will guarantee your money with good yields.”

Hey…there’s a deal! The feds will guarantee your investments…”with good yields.”

Leave it to the government to come up with a can’t-lose investment program.

What do you think, dear reader? Will investors come out ahead? Can an investment program run by the Venezuelan feds, investing in businesses owned by the government, give better returns than a program that invests in money-grubbing enterprises run by greedy capitalists?

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.

The observation that your neighbours are not very lean and therefore deserve no charity makes me remark: personal weight and weight loss, though not a problem I actually have, is one easily observed in wealthy countries. Interestingly, there seems to be – in many lands- a negative correlation between weight and income. In other words, the higher your income, the less likely you are to be obese. (Must be a few statistical anomalies walking about, I read) But obesity is often visible among lower-income earners. Has something to do with the quality of food available – and affordable. And the… Read more »

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